Mortgage Fraud

Penalties for violation of the Federal False Statements Act, which prohibits false statements to the government (including lending institutions), may include up to five years in prison, fines, or both. 18 U.S.C. §1014 prohibits the use of false statements on a loan application and the overvaluation of property in order to influence decisions made by a lending institution, and violations may result in imprisonment for up to 30 years, fines of up to $1 million, or both.  Loan originators can remind loan applicants of the gravity of providing false information by giving them a copy of the FBI’s Mortgage Fraud Warning. An Occupancy Certificate gives loan applicants the option to state whether the property securing a loan will be a primary residence, a second home that the applicant will occasionally occupy, or an investment property that the applicant will not occupy.

Fraud for profit is also referred to as “industry insider fraud” because it:
  1. X

Correct. “Fraud for profit” or “industry insider fraud” involves the use of inflated appraisals, falsified loan documents, stolen identities, fictitious loan applicants, and other illegal tactics to secure loan funds that the loan applicant has no intention of repaying.  In many cases, fraud for profit involves the conspiratorial efforts of industry insiders including mortgage loan originators, mortgage brokers, underwriters, loan processors, real estate agents, appraisers, and attorneys.

Cash-out purchase fraud is a scheme that Freddie Mac has cited as an emerging trend. [1]  These schemes involve the extension of an offer to purchase a home for an amount that is in excess of the list price.  Using an inflated appraisal, the borrower who is perpetrating the fraud obtains a mortgage for more than the home is worth.  After the closing takes place and the seller receives funds from the lender, he/she pays the fraudulent borrower the difference between the list price of the home and the amount shown on the mortgage.

[1] Freddie Mac. “Emerging Fraud Trends: Illegal Property Flipping With Cash-Out Purchases.”

Builder bailout schemes are also carried out by establishing shell companies that purchase new homes at inflated prices, or by attracting investors with fraudulent incentives, which may include promises to provide free property management services or to absorb any negative cash flow for some period of time. After the closing takes place, these promises are not honored.
Red flags for builder bailout schemes include:
  • Appraisals that solely rely on other homes in the same development for comparables
  • Strong sales in a development while the surrounding market is slow
  • Special incentives for home buyers and investors
  • An unclear source of funds for down payments
  • Affiliated parties in the transaction

No comments:

Post a Comment